A Quick Score for the Beverage, Travel, Construction and Broadcast

CORPORATES
MARCH 31, 2014
2014 FIFA World Cup Brazil
SPECIAL COMMENT
A Quick Score for the Beverage, Travel,
Construction and Broadcast Sectors
Little impact for host cities, infrastructure operators and Brazil itself
Table of Contents:
FOOTBALL’S BIGGEST TOURNAMENT
WILL HAVE FLEETING EFFECTS
A BOOST FOR CORPORATE BRAND
IMAGE MORE THAN SALES
WORLD CUP TO DRAW A LARGE
AUDIENCE AND INFLUX OF TOURISTS
WORLD CUP WILL ALSO POSE SEVERAL
CHALLENGES
IMPACT BY SECTOR
INFRASTRUCTURE SPENDING IS JUST A
FRACTION OF INVESTMENT IN BRAZIL
WORLD CUP SPENDING IS WELL
WITHIN REVENUES FOR HOST CITIES
AND STATES
IMPACT OF GAMES PALES BEFORE
BRAZIL’S ECONOMY
MOODY’S RELATED RESEARCH
Football’s biggest tournament will have fleeting effects. Successfully hosting the 2014
World Cup will raise Brazil’s stature on the world stage, but the benefits will be short-lived
for most rated Brazilian companies, infrastructure providers, host cities and states and the
Brazilian government. The tournament will capture the world’s attention, but an
estimated BRL25.2 billion ($11.1 billion) economic boost pales before Brazil’s $2.2
trillion economy, normal levels of investment spending and annual revenues of companies
that will provide food, drink, transport, lodging and services to football fans.
»
A boost for corporate brand image more than sales. Some 3.6 million World Cup tourists
will bring a revenue boost for the food and beverage, lodging, car rental, TV broadcasting
and advertising sectors, but disruptions associated with traffic, crowding and lost work
days will take a toll on business. For most Brazilian companies, the 32-day event in 12
cities will produce short-lived sales increases that are unlikely to materially affect annual
earnings. Still, the World Cup is the infrequent sporting event that offers an opportunity
for global media exposure, benefitting big corporate sponsors including Coca-Cola Co.
(Aa3 stable), Adidas AG (unrated), Anheuser-Busch InBev SA/NV’s (A2 positive)
Budweiser and Oi S.A. (Baa3 negative).
»
World Cup infrastructure spending is a fraction of investment in Brazil. Some BRL26
billion ($11.5 billion) in planned spending on football stadiums and airport, port and
urban mobility upgrades is positive for infrastructure providers, but much of the impact
has already been felt and it is only about 0.7% of overall planned investment in Brazil in
2010-14. Invepar (Ba3 stable) stands out as the most affected by World Cup spending.
Heavy construction companies have gained substantially as well. Construtora Andrade
Gutierrez S.A. (Ba1 stable), OAS S.A. (B1 stable) and Mendes Junior Trading e
Engenharia S.A. (B1 stable) have seen the largest relative contributions to their backlogs.
»
World Cup spending is well within revenues for host cities and states. Official estimates
of spending related to the World Cup for Moody’s rated sub-sovereign issuers range from
a minuscule 0.24% to 12.75% of estimated 2014 revenue. Even under a pessimistic
scenario, spending on World Cup projects would remain well within government
revenues. Among rated sub-sovereigns, World Cup spending as a percentage of revenues is
highest for the state of Mato Grosso (Baa3 stable).
»
Impact of games pales before Brazil’s economy. We see little impact on Brazil (Baa2
stable) considering the limited duration of the World Cup and the size of the country’s
economy. While the event offers a potential reputational benefit, it could be marred by a
reprise of the social unrest seen last June or if needed infrastructure was not ready.
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Analyst Contacts:
SAO PAULO
»
+55.11.3043.7300
Barbara Mattos, CFA
+55.11.3043.7357
Vice President - Senior Analyst
[email protected]
Gersan Zurita
+55.11.3043.7343
Senior Vice President
[email protected]
Marianna Waltz, CFA
+55.11.3043.7309
Associate Managing Director
[email protected]
» contacts continued on the last page
CORPORATES
Football’s biggest tournament will have fleeting effects
The 2014 FIFA World Cup will put host country Brazil in the global spotlight. Brazil boosters hope
that football’s marquee event and the Summer Olympics that follow in 2016 will help lift the country
out of its economic slowdown. But the effects of the World Cup will be short-lived. While successfully
hosting the event will raise Brazil’s stature on the world stage, it will have little lasting impact on most
rated Brazilian companies, infrastructure providers, city and state governments and the Brazilian
sovereign. Social unrest during the games or failure to have needed infrastructure in place could sully
the country’s image, with negative implications across sectors.
The World Cup will draw hundreds of thousands of visitors to Brazil and stimulate economic activity
during the 32-day event, from 12 June to 13 July. Billions of people worldwide will watch at least part
of the 64-match tournament on television. Governments in Brazil are spending about BRL26 billion
($11.5 billion) on infrastructure projects ranging from stadium construction to improvements at
airport terminals. But ultimately the activity associated with the World Cup pales before Brazil’s $2.2
trillion economy, its normal levels of investment spending and the annual revenues of the companies
that will provide food, drink, transportation, lodging and other services to football fans.
For non-financial corporate sectors, the impact will be limited to short-lived sales increases and the
intangible benefits of marketing exposure in stadiums and on television. World Cup-related
infrastructure investment of about BRL26 billion is positive for operators of airports, toll roads and
ports and will strengthen Brazil’s economic competitiveness, but with just months until the opening
match, most of the impact has already been felt. For the Brazilian sovereign, the tournament holds out
the promise of a reputational boost, but its impact will be slight in the context of Brazil’s economy. At
the local level, the 12 host cities have assumed debt to fund infrastructure projects, but not enough to
pose a credit challenge.
A boost for corporate brand image more than sales
The 2014 World Cup will have a minimal impact on most Brazilian companies. The 32-day event will
produce only short-lived sales increases that are unlikely to materially affect annual earnings.
Marketing exposure at the matches and on television will increase brand awareness for corporate
sponsors, although the benefits are difficult to measure. For some companies, the event will prove
disruptive as football mania idles workers and snarls traffic.
The food and beverage, lodging, car rental, TV broadcasting and advertising sectors will see the most
benefit from the influx of visitors. Heavy construction companies have already seen much of the
benefit from stadium construction, airport improvements and other infrastructure projects associated
with the World Cup. Furniture and white-line goods companies should see more concentrated sales in
the second half of the year because consumers will be focused on acquiring televisions before the event.
The flow of tourists will boost regional retail sales and benefit the food and beverage industry, in
particular. For example, we expect that World Cup sponsor Anheuser-Busch InBev SA/NV (A2
positive), the sole beer vendor at World Cup venues and the beer-market leader in Brazil with a 63%
share, will see at least a 2% increase in annual sales volume in the country this year through its
subsidiary Companhia de Bebidas das Americas (AmBev; Baa1 stable). Hotels and car rental
companies will get a boost as well, but the airline sector might be hurt by operational disruptions and a
falloff in business travel.
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MARCH 31, 2014
SPECIAL COMMENT: 2014 FIFA WORLD CUP BRAZIL: A QUICK SCORE FOR THE BEVERAGE, TRAVEL, CONSTRUCTION AND BROADCAST SECTORS
CORPORATES
For most companies, the reach and importance of the World Cup will provide brand exposure that
will be more important than incremental sales volume increases during the event itself. Companies
such as AmBev, BRF S.A. (Brasil Foods; Baa3 stable) and Marfrig Alimentos S.A. (B2 stable) will
benefit from sponsorship of the event or the Brazilian Football Confederation (CBF), which oversees
football in Brazil.
One lasting benefit for many companies across sectors will be a permanent improvement in Brazil’s
transportation infrastructure. This could facilitate increased supply chain efficiency, which would help
lower costs for companies over the long run.
EXHIBIT 1
2014 World Cup Impact by Corporate Sector
Sector
Potential
Direct
Benefit
Comments
Rated Companies Affected
Airlines
Mixed
Increase in traffic but profitability may be hurt
Gol Linhas Aéreas Inteligentes S.A.
Food and Beverage
High
Higher consumption and brand exposure
AmBev
Heavy Construction High
Primary beneficiary, effects already
incorporated
CNO, Construtora Andrade Gutierrez
S.A.; OAS S.A; Mendes Junior Trading
e Engenharia S.A.
Industrials
No direct benefit; exporters may be insulated
from potential disruptions during the games
Braskem S.A.; Steel, Pulp & Paper,
Mining companies
Payment Processors Medium
Marginal benefit from increased retail activity
Cielo S.A
Protein
High
Marketing exposure and potential higher
consumption
BRF S.A.; Marfrig Alimentos S.A.
Advertising/TV
Broadcast
High
Strong growth in advertising revenues
Globo Comunicações e Participações
S.A
Transportation
High
Car rental companies to benefit from influx of
tourists
Localiza Rent a Car S.A.
Low
World Cup to draw a large audience and influx of tourists
The World Cup is the infrequent sporting event that offers global media exposure for corporate
sponsors, which this year include Coca-Cola Co. (Aa3 stable), Adidas AG (unrated), Anheuser-Busch
InBev’s Budweiser and Oi S.A. (Baa3 negative). The last World Cup, in South Africa in 2010, reached
a total in-home audience of 3.2 billion people, or nearly half the world’s population. 1 The average
global audience for each game was 188.4 million, and 1 billion people watched at least part of the
championship match.
The tournament will also be a significant boost for international and domestic tourism in Brazil. The
Brazilian Ministry of Tourism estimates that the World Cup will attract 600,000 international tourists
to Brazil. That would contribute to a nearly 10% increase in leisure travel, according to Euromonitor
International (see Exhibit 2). An additional 3 million domestic tourists will travel around the country
to watch the matches, according to the Tourism Ministry, which predicts a BRL25.2 billion ($11.1
billion) economic boost from the event. After the event, Brazilian tourism should continue to benefit
from the country’s exposure and its improved transportation infrastructure, such as better airports and
enhanced urban mobility.
1
3
2010 FIFA World Cup South Africa: Television Audience Report, prepared for FIFA by KantarSport, a sports and entertainment market research firm.
MARCH 31, 2014
SPECIAL COMMENT: 2014 FIFA WORLD CUP BRAZIL: A QUICK SCORE FOR THE BEVERAGE, TRAVEL, CONSTRUCTION AND BROADCAST SECTORS
CORPORATES
EXHIBIT 2
Inbound Leisure Travel to Brazil
Trips in thousands (L)
7000
Percentage Change (R)
12%
6000
10%
5000
8%
4000
6%
3000
4%
2000
2%
1000
0
0%
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
2017F
Source: Euromonitor International
World Cup will also pose several challenges
While the World Cup will generate significant economic activity over its 32 days, 3.3 million
ticketholders watching 64 football matches in 12 cities will also bring a few adverse effects that will
pose challenges for companies.
An event of this duration and magnitude will disrupt the routine of major cities and consumers.
Crowding and traffic will make it more difficult to move goods and provide services, and may dissuade
consumers from routine daily shopping, hurting apparel retailers, drugstores and retail fuel sales, for
example. Already challenging domestic air travel may be more complicated. Companies are also likely
to see reduced productivity as workers take time off during the World Cup, which will affect laborintensive businesses such as construction and manufacturing, in particular.
Governments in Brazil may also declare holidays. The World Cup Law (Lei Nº 12,663) enacted in
2012 permits the federal government to decree national holidays on days when the Brazilian national
team plays. Additionally, all municipalities that host matches involving other teams may decree
municipal holidays on days those matches take place. These holidays would have an effect similar to
the vacation months of January and February, when retail sales tend to be softer.
There is also a risk of street protests, which could further disrupt business activity during the
tournament. During last June’s Confederations Cup, a football tournament that takes place one year
prior to the FIFA World Cup, protests coinciding with the matches caused some disruption but had
little effect on fan presence at the venues. However, protests away from the Confederations Cup
venues escalated to riots that seriously disrupted regional retail sales due to early store closings, traffic
problems and episodes of looting and vandalism.
Macroeconomic conditions could also damp the impact of the World Cup. The benefit for Brazil’s
economy and companies would be vulnerable to any international macroeconomic slowdown that
limits travel to or within Brazil, domestic concerns such as higher inflation and interest rates that could
reduce consumption and travel and the availability of public and private funding to complete
infrastructure projects.
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SPECIAL COMMENT: 2014 FIFA WORLD CUP BRAZIL: A QUICK SCORE FOR THE BEVERAGE, TRAVEL, CONSTRUCTION AND BROADCAST SECTORS
CORPORATES
Impact by sector
Airlines, Car Rentals and Lodging
Domestic airlines will benefit from an increase in passenger traffic associated with the World Cup, but
the event will likely be disruptive and could hurt profitability. In addition to 600,000 arriving
international tourists, some of the expected 3 million domestic tourists will fly among the 12 host
cities, many of which are separated by thousands of kilometers (see Exhibit 3). But tourists might
displace higher-yielding business travelers during the event, hurting airline profits. We expect to see
business travel decline as a result of elevated hotel rates, traffic and crowding during the event.
Local airlines will need to increase the number of seats available by 15%-20% and make changes in
existing routes to accommodate World Cup demand. The airlines have already requested that Brazil’s
aviation regulator approve 1,973 new flights during the games. The requirement to operate additional
aircraft and temporarily change routes could be quite disruptive for the domestic aviation market,
particularly at a time when Brazilian carriers have adopted more disciplined capacity management to
cope with higher taxes, rising fuel costs and lower demand due to soft GDP growth. The increased air
traffic might also strain airports, some of which may not have completed expected upgrades before the
World Cup begins.
Gol Linhas Aereas Inteligentes S.A. (B3 stable), the largest low-cost and low-fare airline in Latin
America, will be affected the most. But as the official airline carrier for Brazil’s national football team
and the other teams participating in the games, it stands to gain in terms of brand awareness.
Rental car companies will also benefit from tourists’ need to travel among World Cup cities. Localiza
Rent a Car S.A. (Baa3 stable) is best placed because of its dominant market position. The company has
strategic store locations across the country that grant access to both on- and off-airport markets. The
flow of tourists during the tournament should contribute to 10%-15% growth in Localiza’s car rentals
this year. We believe the company can accommodate this growth with just a moderate increase in net
fleet because it is currently operating at 68% capacity utilization.
The lodging sector will benefit from higher occupancy and higher room rates in the 12 host cities
during the World Cup. According to a study by Ernst & Young, 2 approximately BRL3.16 billion
($1.4 billion) was spent to increase hotel capacity by about 15%, or 19,493 new rooms for the World
Cup. However, the sector may suffer from overcapacity after the games because some cities, especially
medium-sized state capitals, may not have enough demand to absorb the added rooms. For major
rated international hotel chains whose Brazilian locations are primarily in Sao Paulo and Rio de
Janeiro, heightened activity during the World Cup will not have a material impact on overall global
revenue.
2
5
Sustainable Brazil: Social and Economic Impacts of the 2014 World Cup
MARCH 31, 2014
SPECIAL COMMENT: 2014 FIFA WORLD CUP BRAZIL: A QUICK SCORE FOR THE BEVERAGE, TRAVEL, CONSTRUCTION AND BROADCAST SECTORS
CORPORATES
EXHIBIT 3
Distances Between World Cup Cities
Distance Matrix in
Km
Sao
Belo
Porto
Rio de
Paulo Horizonte Curitiba Alegre Cuiaba Brasilia Janeiro Salvador Recife
Sao Paulo
Belo Horizonte
Curitiba
586
408 1,109 1,614
1,004
1,712 1,594
1,015
429
1,962 2,660 2,947
3,127
3,971
716
434
1,358 2,061 2,348
2,528
3,951
1,366
852
2,385 3,078 3,365
3,541
4,036
2,027 1,553
3,090 3,779 4,066
4,242
4,563
Cuiaba
1,133 2,017
2,566 3,255 3,543
3,406
2,357
Brasilia
1,148
1,446 2,135 2,422
2,200
3,490
1,649 2,338 2,625
2,805
4,374
839 1,126
1,389
5,009
297
800
5,698
537
5,985
Porto Alegre
Rio de Janeiro
Salvador
Recife
Natal
Fortaleza
711 1,679
Natal Fortaleza Manaus
2,206
5,763
Manaus
Source: DNIT
Heavy Construction
Heavy construction companies will be among the primary beneficiaries of the World Cup, but the
positive effects are softening as projects near completion. Nevertheless, we expect average operating
income for companies in this segment to rise more than 7% in 2014, supported by the Brazilian
government’s focus on infrastructure investments and public-private partnerships.
The largest players, which include Construtora Norberto Odebrecht S.A. (Baa3 stable), Construtora
Andrade Gutierrez S.A. (Ba1 stable), OAS S.A. (B1 stable) and Mendes Junior Trading e Engenharia
S.A. (B1 stable), have been involved in all of the major World Cup projects, including the
construction or renovation of stadiums and upgrades to airports and marine ports. Infrastructure
projects for the World Cup, estimated at BRL26 billion ($11.5 billion), have been an important
contributor to revenues in Brazil during the past few years. Nevertheless, total stadium investments of
about BRL 8 billion ($3.5 billion) constitute only a minor portion of the rated players’ total backlog of
more than BRL 120 billion ($52.9 billion). At its peak, backlog related to the World Cup represented,
on average, about 10% of the total for the large companies in the industry, with the most impact on
Construtora Andrade, OAS and Mendes. (See page 8 for impact on rated infrastructure operators.)
During the 32 days of the World Cup, heavy construction companies may be negatively affected by a
decrease in working hours and lower productivity. Mendes Junior and OAS are more vulnerable to
this risk owing to their higher exposure to Brazilian projects.
Food and Beverage
The World Cup represents a major opportunity for Brazilian consumer goods companies to strengthen
connections with consumers through their association with an event that is deeply ingrained in the
country’s culture. It will also be a chance for wide exposure outside Brazil, which is especially
important to companies with global aspirations. This will be more significant in the long run than the
expected incremental boost in sales during the tournament.
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SPECIAL COMMENT: 2014 FIFA WORLD CUP BRAZIL: A QUICK SCORE FOR THE BEVERAGE, TRAVEL, CONSTRUCTION AND BROADCAST SECTORS
CORPORATES
We expect the World Cup to help lift AmBev’s annual beer volume in Brazil by 2%. The company has
significant experience with football-related events as a sponsor of 21 regional clubs in nine Brazilian
states and its sponsorship of the Brazilian national football team with the domestic beer brand Brahma
and the carbonated soft drink Guaraná 3 Antarctica. AmBev was a sponsor of the 2010 World Cup in
South Africa and the sole provider of beer and refreshments at Confederations Cup matches last year.
The company has expanded its production and distribution capacity during the past few years.
AmBev’s marketing expenditure related to the event should be concentrated in the first half of the
year, much as it was in 2013 prior to the Confederations Cup. The company has indicated that the
percentage increase in its selling, general and administrative expenses in the second quarter should be
in the high-single digits to low-double digits from an already elevated year-ago level.
Processed-foods companies like BRF and Marfrig also stand to benefit from marketing exposure. BRF
has recently started to sponsor the Brazilian national football team with the Sadia food brand. We
expect it to see about a 1% boost in annual sales from the World Cup. The company gains 56% of its
revenues from Brazil and 46% from its processed-foods and food services portfolio.
Marfrig will focus its marketing effort in Europe, where it can leverage its connection with regional
customers by spotlighting the Moy Park brand, increasing its brand penetration. The company was a
sponsor of the FIFA 2010 World Cup, where the brand could be seen on the sidelines of the matches
involving England, France and the Netherlands. Marketing efforts will include an on-pack promotion
that will take selected shoppers to the tournament’s semifinal matches in Brazil. It could also use the
event to increase consumer familiarity with recently launched Marfrig brand products and promote
commercial relations.
Broadcast Television
The Brazilian advertising market is expected to grow 12.7% in 2014 compared with 6.1% growth in
2013, according to Magna Global, a strategic global media unit of IPG Mediabrands. That would be
positive for Globo Comunicacao e Participacoes S.A. (Baa1 stable), Brazil’s leading TV broadcasting
company. Globo, which will broadcast all 64 World Cup matches, has historically grown more than
the overall Brazilian advertising market – notably during the previous World Cup years of 2006 and
2010 (see Exhibit 4).
Globo has already sold out its World Cup advertising space to eight sponsors: Ambev, Johnson &
Johnson (Aaa stable), Coca-Cola, Itaú Unibanco S.A. (Baa2 stable), Oi, Hyundai Motor Co. (Baa1
stable), Nestle S.A. (Aa2 stable) and Magazine Luiza (unrated). Most of these sponsors are Globo’s
regular advertisers for other major events, such as Formula 1 auto racing and the Brazilian football
championships, so it is hard to assess the exact direct benefit of the World Cup for Globo’s revenues
and cash flows this year.
In accounting terms, Globo had completely paid FIFA for the exhibition rights as of early 2012, and
received up-front payments from advertisers in the second half of 2012 and accounted for them in the
same period. Revenues, however, will be recognized as the advertisements are aired on broadcast and
pay TV, mostly during the first half of 2014.
3
7
Guaraná, paullinia cupana, is a fruit from the Amazon known to have properties that stimulate physical and mental activity.
MARCH 31, 2014
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CORPORATES
EXHIBIT 4
Growth of Nominal GDP, Total Advertising Revenue and Globo Advertising Revenue
Nominal GDP
Total Advertising Revenue
Globo Advertising Revenue
30%
25%
20%
15%
10%
5%
0%
2005
2006
2007
2008
2009
2010
2011
2012
Source: Globo Comunicação e Participações S.A
Payment Processors
Payment processors such as Cielo S.A. (Baa2 stable) will benefit marginally from retail activity
associated with the World Cup, since the extra volume brought in by foreign tourists should be offset
by lower utilization of payment cards on holidays and off-days. But acquirers should take advantage of
the event to accelerate penetration of point-of-sale terminals, especially in more remote regions of
Brazil where important matches will take place and local retailers’ acceptance of debit and credit cards
is still lower than in more developed locations. Brand promotion by Visa Inc. (A1 stable), an official
partner of FIFA, should also increase merchants' demand for POS terminals.
Commodity Exporters and Industrials
We do not see any clear benefit from the World Cup for commodity exporters and industrial
companies. However, exporters and commodity producers that target international markets may have
an advantage over companies dependent on the domestic market because the latter will be more
vulnerable to the same disruptions in major Brazilian cities and loss of working days that will affect the
heavy construction sector.
Infrastructure spending is just a fraction of investment in Brazil
Immediately after Brazil’s selection in 2007 as the site of the 2014 World Cup, the Brazilian federal
government announced a plan to foster public and private investments in the infrastructure sector
estimated at around BRL26 billion ($11.5 billion). Much of this spending was earmarked for
transportation projects, such as expansions at airports and marine ports; urban mobility initiatives
including highways, terminals, bus stops and monorails; and construction or renovation of 12 football
stadiums. In addition, the Brazilian Ministry of Mines and Energy planned capital expenditures of
BRL1.7 billion ($750 million), mostly to strengthen the electricity distribution network to meet an
expected increase in energy consumption during the World Cup.
While this spending is credit positive for infrastructure issuers, much of the impact has already been
felt and is already factored into our credit assessments. The spending is also relatively minor: We
expect that infrastructure spending associated with the World Cup will represent only about 0.7% of
overall planned investment in Brazil during 2010-14. Further, the BRL1.7 billion of spending on
electricity distribution is a relatively small amount in terms of the distribution utilities’ historical
investments. In 2012, for example, capital expenditures among the 63 Brazilian electricity distribution
companies totaled about BRL10 billion ($4.4 billion), according to the Brazilian Association of Energy
Distribution Companies.
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CORPORATES
EXHIBIT 5
2014 Brazil World Cup Planned Investments by Sector and Source of Financing
Number of Projects
Total Planned
Investment (BRL
mm)
Public
Private
Disbursed as of
February 2014
29
6,740
3,344
3,396
4,735
6
585
585
-
432
Urban Mobility
45
8,020
8,020
-
2,942
Stadiums
12
8,005
4,002¹
4,002¹
4,536
Other²
209
2,628
2,628
-
333
Total
303
25,978
18,580
7,398
12,978
Sector
Airports
Ports
¹ Moody’s estimate.
² Includes investments in various fields such as public security, telecommunications, tourism development and temporary physical structures.
Source: Office of the Comptroller General of Brazil (CGU), as of 5 March 2014
Among rated infrastructure issuers, Invepar (Ba3 stable) stands out as the most affected by World Cup
spending. In February 2012, the Invepar-ACSA consortium won the São Paulo International Airport
(GRU) concession with a bid of BRL16.2 billion ($7.1 billion). Of this amount, Invepar will be
responsible for BRL7.5 billion ($3.3 billion) in proportion to its share in the consortium. We expect
Invepar’s net revenue to increase by about 50% over the next two years from BRL4.6 billion ($2
billion) for the 12 months ended 30 September. But it will incur about BRL9.5 billion ($4.2 billion)
of additional debt, of which BRL7.5 billion is to be paid over the 20-year life of the concession in the
form of concession payments. The additional indebtedness could have a material negative impact on
Invepar’s credit metrics if the company were not able to increase operating revenues and cash flows as
expected and to secure long-term funding at adequate terms.
Several electric utilities will also be affected by the World Cup, including Companhia de Eletricidade
do Estado da Bahia (Coelba; Baa2 stable), Companhia Energetica de Minas Gerais (Cemig; Ba1 review
for downgrade), Eletropaulo Met. Elet. de Sao Paulo (Ba1 stable) and Light Servicos De Eletricidade
S.A. (Ba1 stable). Electricity distributors have been exceeding regulatory requirements for capital
spending to meet service quality standards, avoid fines and enhance their corporate image during this
high-visibility event.
Of the total BRL27.7 billion ($12.2 billion) of World Cup capital expenditures associated with
infrastructure, including investments in electricity distribution, we estimate that around 72% will be
executed by the public sector at the federal, state and municipal levels. In addition, the federal
government through its public financial institutions will finance BRL9.9 billion ($4.4 billion), or 38%
of total planned capital expenditures.
Airports
Airports pose one of the main challenges for the 12 Brazilian host cities scattered across the country,
from Manaus in the Amazon State to Porto Alegre in the southernmost state of Rio Grande do Sul.
Brazil’s airports have not received sufficient investment to keep pace with the sharp growth in
passenger traffic during the past decade. Nevertheless, refurbishment and expansion projects for key
airports, such as São Paulo – GRU and Rio de Janeiro, are in the advanced stages and are expected to
be ready for public use in May.
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CORPORATES
EXHIBIT 6
Airport Improvement/Expansion Projects
Airports
Number of Projects
Total Planned Investments (BRL mm)
Disbursed as of February 2014
Belo Horizonte
3
509
96
Brasília
3
651
341
Cuiabá
2
91
45
Curitiba
3
84
41
Fortaleza
1
350
57
Manaus
1
395
283
Natal
2
558
115
Porto Alegre
2
351
3
Recife
-
-
-
Rio de Janeiro
3
813
240
Salvador
3
48
27
São Paulo
6
2,890
3,487
29
6,740
4,735
Total
Source: Office of the Comptroller General of Brazil (CGU), as of 5 March 2014
Urban Mobility
Urban mobility investments consist of 45 projects, including highways, terminals and monorails.
These investments are scattered across all 12 cities that will host matches, depending on each
municipality’s transportation demand. The Brazilian federal government is providing municipalities
with long-term financing for these projects through the federally controlled banks Caixa Economica
Federal (Baa2 stable) and BNDES (Baa2 stable).
EXHIBIT 7
Urban Mobility Project Statistics
Urban Mobility
Number of Projects
Total Planned Investments (BRL mm)
Disbursed as of February 2014
Belo Horizonte
7
1,405
608
Brasília
1
44
-
Cuiabá
3
1,719
647
Curitiba
10
464
160
Fortaleza
6
575
70
Natal
3
472
-
Porto Alegre
2
16
-
Recife
7
890
513
Rio de Janeiro
3
1,867
944
Salvador
2
20
-
São Paulo
1
548
-
45
8,020
2,942
Total
Source: Office of the Comptroller General of Brazil (CGU), as of 5 March 2014
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World Cup spending is well within revenues for host cities and states
The World Cup will not have any effect on the long-term credit quality of Moody’s-rated Brazilian
cities and states that host the games. Most investments tied to the World Cup are one-time
expenditures in areas such as roads and urban and housing development. While accelerated public
spending will create small, near-term credit-positive effects in some states, this spending will not lead
to sustained credit improvement.
Official estimates of spending related to the World Cup for Moody’s rated sub-sovereign issuers range
from a minuscule 0.24% to 12.75% of estimated 2014 revenue (see Exhibit 9). Even under a
pessimistic scenario that assumes a 100% cost overrun, 4 spending on World Cup projects would
remain well within government revenues for most of these issuers.
The 12 cities hosting the World Cup will benefit from accelerated economic activity during the games,
but the longer-term benefits are less certain. Many of the transportation improvements arising from
the World Cup were part of the cities’ normal expansion plans.
Mato Grosso Will Have Biggest Increase in Spending
The rated Brazilian state with the largest exposure to World Cup spending is Mato Grosso (Baa3
stable), but its costs will be manageable. Mato Grosso is located in the center-west portion of the
country; its capital, Cuiaba, is one of the host cities.
Projects the state is financing include construction of a new, 42,968-seat stadium; a light-rail system
and an initiative to promote tourism. Though this will increase Mato Grosso’s debt-to-total-revenues
ratio to 51.25% from an estimated 42.58%, the ratio will still be below the median for Moody’s-rated
sub-sovereigns (see Exhibit 8).
EXHIBIT 8
Net Direct and Indirect Debt/Total Revenue
Mato Grosso, State of
Moody's-rated Brazilian States Median
90
80
70
60
50
40
30
20
10
0
2009
Source: Moody’s Investors Service
4
11
2010
2011
2012
2013 Est.
2014 Est.
We view a 100% cost overrun as a pessimistic scenario. But we note that much larger overruns are common in the staging of the Olympic Games, which require a larger
variety of sports venues than the World Cup, an Olympic village and other amenities. In a June 2012 research paper, “Olympic Proportions: Cost and Cost Overrun at
the Olympics 1960-2012,” academics at the Said Business School, University of Oxford, found that the average cost overrun for an Olympic Games is 179% of budgetat-bid in real terms.
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Under our pessimistic scenario, World Cup spending would consume a quarter of Mato Grosso’s
annual revenue. Even if the pessimistic scenario materializes, we do not expect a significant increase in
debt because changes in the debt and budget ceilings must be approved by the local congress.
However, budgetary reallocations would put pressure on Mato Grosso’s financial flexibility and
liquidity management.
EXHIBIT 9
2014 World Cup Impact by Moody’s-rated Sub-Sovereign Issuer
Budget for
World Cup-related Activities
World Cup
Host City
Official Estimate
(in BRL millions)
Moody's
Pessimistic
Scenario
(BRL mm)
Belo
Belo
Horizonte, Horizonte
City of
253.1
506.1
11,468.7
1,256.2
10,212.5
2.5%
5%
Minas
Gerais,
State of
372.2
744.5
66,026.4
3,281.4
62,744.9
0.6%
1.2%
World Cup
transparency
website
1,440.8
2,881.6
13,345.6
2,048.9
11,296.7
12.8%
25.5%
World Cup
transparency
website
Moody's
Rated
Issuer
2014 Budget
(BRL mm)
Financing*
(BRL mm)
2014 Revenues**
(BRL mm)
Official
Estimates
as Share of
Revenues
Moody's
Scenario as
Share of
Revenues
Source of
Official
Estimate***
Municipality's
transparency
website
Mato
Grosso,
State of
Cuiabá
Paraná,
State of
Curitiba
113.3
226.6
34,706.5
1,283.9
33,422.6
0.3%
0.7%
State's
Budget Law
Rio de
Janeiro,
City of
Rio de
Janeiro
514.2
1,028.5
23,449.8
2,408.4
21,041.4
2.4%
4.9%
World Cup
transparency
website
397.9
795.8
178,234.8
9,298.6
168,936.2
0.2%
0.5%
State's
Budget Law
Sao Paulo, Sao Paulo
State of
* Borrowing authorized by the issuers’ local congresses
**Excluding financing
***Issuers' transparency sites and World Cup transparency sites were consulted for this work. In the case of discrepancies between the two sources, we took the higher estimate.
Impact of games pales before Brazil’s economy
We view the World Cup as neutral for the Brazilian soveregin’s credit quality. The games will last just
one month and the associated economic stimulus will pale before Brazil’s $2.2 trillion economy. The
Brazilian government expects the World Cup to boost GDP by just 0.4% from 2010-19. Much of the
macroeconomic impact has already been felt through infrastructure spending. Overall, the impact will
be more meaningful at the local level.
While the World Cup presents a potential reputational benefit, this could be marred if there were a
reprise of the social unrest seen last June during the Confederations Cup or if needed infrastructure
was not ready.
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Moody’s Related Research
Credit Analysis:
»
Brazil, Government of, January 2014 (162135)
Credit Focus:
»
Brazil: Ongoing Protests Have Limited Impact on Sovereign Credit Perspective, July 2013
(156113)
Special Comments:
»
Sochi 2014 Winter Olympics: Uncertainty over Long-term Legacy Overshadows Benefits.
February 2014 (163533)
»
London 2012 Olympics Provide a Short-term Boost, But No Gold Medal for Corporates, May
2012 (141487)
»
State of Utah, City of Salt Lake Olympic Winter Games – 2002, June 1999 (45594)
»
Global Beverage Industry: 2014 Sporting Events Will Boost Coca-Cola and Anheuser-Busch in
Key Emerging Markets, February 2014 (164276)
»
Below-Trend Growth in Brazil Presents Limited Credit Risks to Rest of Latin America, January
2014 (163059)
»
Brazil’s Airport Concessions: Continuing the Learning Curve, November 2013 (160248)
»
Brazil’s Airport Concessions – The Fundamentals, December 2011 (138394)
Sector Comments:
»
Japan: Olympic Games in Tokyo Are Credit Positive for Condominium Developers, September
2013 (SF343483)
»
Brazilian Corporate Credit Quality Poised for Improvement on World Cup, Olympic Spending,
October 2009 (120673)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of
this report and that more recent reports may be available. All research may not be available to all clients.
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SAO PAULO
» contacts continued from page 1
Analyst Contacts:
SAO PAULO
+55.11.3043.7300
Soummo Mukherjee
+55.11.3043.7341
Vice President - Senior Credit Officer
[email protected]
Cristiane Spercel
+55.11.3043.7333
Assistant Vice President - Analyst
[email protected]
Erick Rodrigues
+55.11.3043.7345
Assistant Vice President - Analyst
[email protected]
Jose Soares
+55.11.3043.7339
Vice President - Senior Credit Officer
[email protected]
Alexandre De Almeida Leite +55.11.3043.7353
Vice President - Senior Analyst
[email protected]
+55.11.3043.7300
Daniela Jayesuria
+55.11.3043.7305
Vice President – Senior Analyst
[email protected]
Marcos, De Oliveira
+55.11.3043.7312
Assistant Vice President - Analyst
[email protected]
MEXICO CITY
Report Number: 166461
Authors
Barbara Mattos
Jose Soares
Alejandro Olivo
Mauro Leos
+52.55.1253.5700
Alejandro Olivo
+52.55.1253.5742
Vice President - Senior Credit Officer
[email protected]
Production Specialist
Wing Chan
Francisco Vazquez-Ahued +52.55.1253.5700
Assistant Vice President - Analyst
[email protected]
NEW YORK
+1.212.553.1653
Mauro Leos
+1.212.553.1947
Vice President - Senior Credit Officer
[email protected]
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